December 13, 2012

Forget Basel III and go directly to Basel IV, but first make the Basel Committee accountable to someone.

Sir, as you can imagine after the over 900 letters I have written to you about the not really discussed  fundamental mistakes of Basel II, Thomas Hoenig’s “Get Basel III right and there will be no need for Basel IV” December 13, is an extremely welcomed analysis. And it is on the dot when it comes to analyzing bank capital in terms of the risk of bank failures and its consequences. 

But different capital requirements for different perceived risks, also translates into allowing different leveraging of the net after risk and transaction cost margins, something which distorts the markets immensely. It favors what is ordinarily already favored “The Infallible”, and thereby discriminates against what is already being discriminated against, “The Risky”, like the unrated small businesses and entrepreneurs. And in this respect it completely stops the banks from performing efficiently their vital economic resource allocation function. 

So add up these two main lines of criticism, that it does not work for making banks safe and that it does not work for making the economy grow sturdier, and it is easy to understand why Basel II and the current pre-Basel III need, for the sake of our banks and our economies, to be thrown out lock stock and barrel. 

Clearly going from a Basel II to a more correct Basel IV with 8-10 percent tangible equity on all assets, requires some deft navigation skills if we want to avoid hurting the current economy more needlessly. But it can be done! 

That said before allowing bank regulatory schemers scheme and tweak our banks more we must make the Basel Committee for Banking Supervision publicly accountable to someone in a transparent way… and of course start by asking them… what is the purpose of our banks?... so as to see if we agree. 

But, knowing us, even if we correct all that needs to be corrected now, I can assure you that there, sooner or later, will still be need for a Basel IV, IV.2, V and so on… and Thomas Hoenig is clearly well aware of that too.